How Does the Funding Rate Mechanism Anchor the Perpetual Futures Price to the Spot Price?

The funding rate is a periodic payment exchanged between long and short traders to keep the perpetual contract price aligned with the underlying asset's spot price. When the contract price is higher than the spot price (in contango), longs pay shorts, incentivizing selling that pushes the price down.

Conversely, when the contract price is lower than the spot price (in backwardation), shorts pay longs, encouraging buying that pushes the price up. This constant financial pressure helps to correct deviations and maintain the peg.